Nelson–Siegel decay factor and term premia in Japan

Junko Koeda*, Atsushi Sekine

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

This study examines the low–interest rate environment in Japan from mid-1990 to the end of 2020, using a dynamic Nelson–Siegel framework emphasizing the role of the decay factor. A regime-switching model estimates that the regime with low decay factor and bond yield volatility (“low” regime) has persisted since the early years of Bank of Japan's quantitative and qualitative monetary easing (QQE) policy. A shift away from the low regime can instantly increase the 10-year government bond yield by over 50 basis points by increasing the term premiums with little changes in the expected short rate.

Original languageEnglish
Article number101204
JournalJournal of The Japanese and International Economies
Volume64
DOIs
Publication statusPublished - 2022 Jun

Keywords

  • Decay factor
  • Japan
  • Nelson–Siegel
  • Regime switching
  • State space model
  • Term premium
  • Yield curve control

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics
  • Political Science and International Relations

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